Australia is proud of its savings industry, with the third pillar – compulsory superannuation – often described as a model for other nations to follow. The first pillar – government pensions – and the second – savings incentives, such as co-contributions – are not much to be proud of on a world scale, so a lot of faith is being placed in the compulsory part of the system. This is why the adequacy debate is still dragging on more than 20 years after Award Super paved the way for the Superannuation Guarantee.
It is interesting to see, therefore, what other countries, which are very similar to Australia, can do without compulsion. New Zealand has, until recently, had a chequered history, including a failed referendum on compulsory super, but last year’s introduction of the Kiwi Saver incentives scheme looks like succeeding more, and more quickly, than anyone imagined. When coupled with the continued growth of the NZ Superannuation Fund, the country is finally making progress towards solving its demographics problem.
Michael Cullen, the deputy prime minister and finance minister, announced last month at the Fund Executives Association Ltd (FEAL) Fund Forum in Wellington, NZ, that 670,000 people had signed up for Kiwi Saver after 11 months. This compares with the official forecast of 270,000 after a full 12 months. “So, we’re heading towards one million by the end of the year,” he told the forum, which was the first FEAL event held outside of Australia.
Under the scheme, the Government tips in NZ$1,000 as a kick-start, a tax credit of up to NZ$1,042.86, a fee subsidy and, if you qualify, a first home deposit subsidy. The scheme is not intended to be universal, targeting rather what Cullen called the third through to the eighth deciles of income earners. “Kiwi Saver is hitting the target well,” he said. “Through the early period the profile of the average member has changed: they are younger, with more and more under 35-40. About 180,000 are under 25. And contrary to predictions the majority are women and the take-up by Maori and Pacific Islanders is not much less than the others.”
Importantly, he believed that Kiwi Saver was starting to change people’s attitudes to saving, from one which was very poor to one which focused on the long term. He thought that the take-up rate would be sufficiently high that any benefit from NZ moving to a compulsory scheme, which is often discussed but considered highly unlikely, would be marginal.
The Australian scheme was made possible because of a number of unique factors including a “highly centralised wage system” at the time. The other major initiative, the NZ Superannuation Fund, was created in 2001 and started investing, with $2.4 billion, in September 2003. The Government aims to put in another $2 billion each year for 20 years. The fund had $14.3 billion as at April this year. Like Australia’s Future Fund, NZ Super is a special purpose pension fund, rather than a foreign exchange or resources reserves-based sovereign wealth fund.
The money will offset the general pension drain from an ageing population in which the number of retired people will double by 2050. The fund is expected to total about $109 billion by 2025. Amazingly, it is expected to be worth about half of NZ’s GDP by 2040, before it starts to tail off due to drawdowns.
Adrian Orr, NZ Super’s chief executive, spoke at the FEAL forum about the fund’s asset allocation and investment policies, including ways it could take advantage of its liquidity and long-term horizon, such as being a lender to sound-but-illiquid investments.
The tough market conditions had a silver lining for the fund because everything was at a discount, he said. The fund prides itself on being among the most transparent in the sovereign wealth fund universe studied by the Peterson Institute for International Economics in Washington, among other bodies. Its website, nzsuperfund.co.nz, is well worth a look.
NZ Super has also been a trend setter in responsible investing, from the early days under its inaugural chief executive, Paul Costello. Costello, who now runs the Future Fund, recently said that the Future Fund was developing its policy on environment social and governance issues and this should be finalised later this year.
A recent policy initiative of NZ Super was to announce that it would terminate investments in companies which made “cluster bombs”. The fund estimated that it had $26 million in companies identified by an external screening agency as potentially being involved in some way in the manufacture of the bombs. Cluster bombs will be prohibited under a convention which is open for signature at the end of this year. They include a large number of bombs which are scattered and often involve taking civilian lives long after the initial explosion.
Orr told the FEAL forum that NZ Super viewed exclusions from investments, such as that, as a last resort, after “engagement” with the company did not have the desired effect.
The forum was sponsored by BNP Paribas Securities Services, which is the only global custodian that has a significant presence in NZ, with a local staff of about 60.